Statement by the Honorable Nicolás Eyzaguirre
Minister of Finance of Chile
Speaking on behalf of the Southern Cone Countries
International Monetary and Financial Committee
Washington D.C., September 28, 2002

The International Monetary and Financial Committee statement on behalf of the constituency comprising Argentina, Chile, Paraguay, Uruguay.

I. A Vulnerable Global Economy

1. Global economic prospects continue to depend heavily on the
currently less dynamic US economy. The absence of alternative engines
to lead the global growth process weakens and delays the recovery, critically
affecting conditions in emerging markets and developing economies in general.
Consequently, policy stimulus in the advanced countries should not be
withdrawn before clearer signs of recovery appear. Given that in today's
environment inflationary pressures are subdued, and especially in view
of the fact in some regions the challenge is deflation, monetary policy
should remain supportive as the first line of defense. The medium-term
fiscal framework in the US should serve to avoid further imbalances and
a crowding-out effect that may end up raising interest rates. In Europe,
the automatic fiscal stabilizers should be allowed to operate complemented
by a strengthening of structural reforms in products and labor markets,
while in Japan the reforms of the financial system and corporate sector
remain critical. Unfortunately, in most emerging market economies the
scope for supportive macroeconomic policies is extremely limited given
the low appetite for risk and the subsequent net capital outflows affecting
those economies. The pending uncertainties have been recently exacerbated
by the growing Middle East tensions including the possibilities of a military
conflict of unknown consequences that already has affected international
oil prices.

2. After years acting as the single global growth engine the US economy
has accumulated some structural imbalances that limit its chances
for growth recovery at least in the near future. The US corporate sector
is lowering its capital spending plans, as it is being affected by confidence
shocks, an ensuing credit contraction and overcapacity in several sectors.
Consumers are entering a stage of greater caution after the increase in
unemployment, the bursting of the equity bubble and the common wisdom
that the gains in real estate prices should have a limit. While the US
economy deserves some rest and recuperation, other economies should play
a more dynamic role.

3. Several smaller advanced economies have consistently implemented significant
structural reforms and together with the best performers among emerging
market economies have the potential of play a leading role in global growth.
Unfortunately, they lack the critical mass required to pull the
global economy, particular when investors are retrenching from risks.
It seems increasingly unlikely that they as well as the other major advanced
economies could even remain unaffected by a slowdown in the US economy,
let alone make up for it. In a globalized world, most countries lean on
an export-led strategy for growth, and while an increasing proportion
of world exports has been directed to the US market, demand from the other
major advanced economies, Japan and the major European economies, have
been shrinking. These economies should accelerate their structural reform
programs, --Europe particularly in product and labor markets and Japan
in the financial and corporate sectors--, and maintain supportive demand
policies so that they can finally make the contribution to global growth
that has been expected from them for so long.

4. This weak demand environment is reflected in the growing pressures
for protectionist trade measures in advanced economies. These pressures
will need to be forcefully resisted through genuine attempts at achieving
a more complete liberalization of global trade. In this regard we need
simply point out the harm-from the perspective of balanced growth in the
world economy-caused by the staggering size of resources used by developed
countries for the subsidization and protection of agricultural production.
Measures against protectionism include the elimination of tariff peaks
and escalation as well as of other forms of price support schemes and
cross-border restrictions. The growing use of trade remedy actions such
as antidumping procedures as protectionist devices should also be eliminated.

5. Global linkages with the US economy are not only limited to
trade, they are also financial, and while the US economy absorbed an increasing
portion of world savings, investors appeared also to be more willing to
take risks elsewhere. The equity market turmoil and the fall in profitability
in the US appear also to have affected the investment plans of multinationals
corporations all over the world and tend to lower the risk appetite of
investors. This signals the risks for the global growth involved in a
sudden resolution of the current account imbalances and currency misalignments,
which could develop into a hasty pull back out of equity funds and further
contractions of investments in emerging markets and riskier assets in
general.

6. The higher generalized risk aversion and the dramatic adjustments
in the level and volatility of asset prices and trading volumes are signals
of a turnaround in financial markets that pose significant systemic risks
if this trend continues. The declining level of corporate profitability
in mature markets, and the confidence shocks that have arisen as a result
of the continuous stream of accounting irregularities in some advanced
economies, have generated a high level of uncertainty and contributed
to the heightened risk aversion. These developments have adversely affected
emerging market economies, even the healthier ones, and underscore the
need for furthering the initiatives adopted to reinforce corporate governance.
Effective corporate governance and enhanced financial disclosure highlight
the importance of a suitable regulatory framework encompassing clear and
adequate accounting and audit rules, disclosure standards and effective
supervision of over-the-counter derivatives.

7. Prospects in emerging markets remain clouded by sluggish global
economic growth, heightened global risk aversion and by varying degrees
of contagion from the countries in crisis. Despite the continuous an unparalleled
efforts at structural reforms in emerging market economies, economic growth
in this asset class is dampen by the investors reluctance to further their
exposure. The reversal of net capital flows to emerging markets indicates
the significant risks of a long-lasting low-growth scenario for these
economies. The external financing conditions impose restrictions on their
policies, with many emerging economies unable to allow the automatic fiscal
stabilizers to operate fully, while others have had to submit to strong
pro-cyclical fiscal adjustments because of the financing constraints.
Monetary easing may be also limited by the threat of a sharp currency
depreciation, which in many emerging market countries poses risks for
the fiscal position, for private corporations, and for the financial system.

8. Crises among emerging market economies remain a frequent occurrence,
and now they seem to have become concentrated in Latin America.
However, it should not be forgotten that emerging market crises are not
geographically defined, and while countries in regions other than Latin
America have not yet come out of crises of their own, or remain highly
vulnerable to them, some Latin American countries still maintain strong
external financial positions and have faced limited contagion.

9. All in all, the global economy remains vulnerable to the US economic
cycle and lacks the risks diversification that would be provided by alternative
growth engines. The solution lies on the other advanced economies,
the larger ones in Europe and Japan, that should implement structural
reform programs and supportive demand policies to play a more dynamic
role in global growth. In this low growth environment the stakes for the
emerging market countries as well as for the Fund and its membership,
are larger than initially anticipated. Crises have become a frequent occurrence
and the systemic risks associated with them are also rising. In this regard,
the timely and sufficient availability of official external financing
is instrumental in facilitating an orderly adjustment process. The outcomes
of these crises are not foreordained, and the actions of the Fund and
its leadership over other IFIs are of key importance in this regard. If
official liquidity support is insufficient or arrives late, the crisis
will deepen, affect also other markets and the uncertainties will be magnified.
By playing its role, the Fund has much to contribute in preventing new
crises from happening and in curbing and resolving those crises already
in progress. I will again refer to conditions in emerging market in the
last section which is devoted to Chile and the Southern Cone countries.

II. The Fund and Crisis Prevention and Resolution

10. Despite all the advances in crisis prevention, surveillance, transparency,
standards and codes, crises appear to be more frequent and stronger
than ever. Domestic factors and policy-induced vulnerabilities have played
a role in the onset of crises currently affecting a number of emerging
market economies. However, it is the global environment-characterized
by sluggish growth and volatile international capital flows-the critical
underlying factor behind the frequency and extent of the financial crises.
The IMF has an important role to play in reducing uncertainty and preserving
financial stability, by strengthening its global surveillance process,
and through its technical and financial support to the countries affected.

11. The promotion of a stable macroeconomic environment conducive to
growth and stability for the membership at large requires addressing systemic
issues and adapting the surveillance process to the evolving global
economy. To be effective, surveillance should not be limited to the countries
at risk and the assessment should cover all members with exposure or participation
in international markets. Surveillance should consider not only the effects
of policies on the originating country, but also their international repercussions.
A more effective surveillance to advanced economies seems critical for
global growth and stability.

12. The Fund must ensure the availability of sufficient resources
to effectively respond to crises. Due to the pace of globalization in
the 1990s, international transactions -including trade, current payments
and reserves-have increased faster than global GDP and become more volatile.
Consequently, the size of Fund resources relative to these measures has
declined more than with respect to GDP. Available Fund resources should
be defined by a forward-looking approach that recognizes the characteristics
of the global environment and the demands on the institution. Moreover,
in light of the uncertainties, a significant "prudence premium"
should be considered in assessing the adequacy of the Fund's resources.
There are asymmetric costs, whereby the international community would
face higher costs from shortfalls of Fund resources than from an "excessive"
quota base.

13. While capital markets have become more discriminating, there are
consequences of contagion risk, which should be given weight in
the decisions on access to Fund resources. The Fund should stand ready
to mitigate regional and systemic risks, and it should aim at facilitating
a cooperative equilibrium in crisis countries so that insufficient liquidity
does not turn into insolvency. Recent events and, more generally, the
conditions confronting emerging market countries, ultimately indicate
that greater consideration for the Fund's role akin to international lender
of last resort should not be ruled out.

14. We favor the notion of maintaining some constructive ambiguity regarding
the level of access to financing that the Fund would be prepared
to provide in exceptional cases, namely, those situations in which capital
account shocks result in financing requirements that cannot be met within
the normal access limits. We would underscore the importance of avoiding
unnecessary restrictions on the Fund's ability to act swiftly and cooperatively
to minimize the consequences of such disturbances. Maximum exposure limits
should be avoided, but there should be other requirements for enlarged
access, including a high probability that the debt of the member country
experiencing the disturbance is sustainable, while ensuring that good
prospects for regaining market access in a reasonable time horizon are
maintained, and that an economic policy program with a reasonable prospect
of success can be rapidly implemented.

15. Moral hazard should not be dismissed, but neither should it
become the central source of concern. After the Russian and Argentine
defaults and the open discussions regarding the Sovereign Debt Restructuring
Mechanism (SDRM), it should be clear to the whole range of investors-from
the less to the most sophisticated among them-that there are no implicit
bailout guarantees. This leaves little room for "investors' moral
hazard", while the shrinking capital flows to emerging market economies
since the late 1990s provide little empirical support to the relevance
of the moral hazard hypothesis. On the other hand, program conditionality
and debt sustainability requirements, that allow for safeguarding the
Fund's credibility and its resource base, also entail minimizing moral
hazard on the part of country authorities. The policy-induced adjustments
associated with the use of Fund resources imply social and political sacrifices
that are a significant counterbalance to excessive risk. More importantly,
however, the Fund is unlikely to fulfill its role of promoting growth
and financial stability if it seeks to tackle moral hazard in its credit
operations by limiting the overall size of its financial resources.

16. Reducing the social and economic consequences of sovereign debt
restructuring episodes constitutes a worthy objective for the SDRM,
a mechanism to be used in the exceptional cases that debt becomes unsustainable.
We remain of the opinion that the statutory and the contractual approaches
are complementary elements to be refined in an effort to provide a feasible
mechanism for the resolution for sovereign debt crises, and we believe
that the sovereign debtor is the only party cognizant of the full costs
of exercising the restructuring option and should have the exclusive authority
to activate the mechanism. At the same time, account should be taken of
the need for continuing support from the Fund during the restructuring
process-in the context of its lending into arrears policy-so as to facilitate
an orderly economic adjustment and debt restructuring. Regarding the scope
of the debt to be covered under the SDRM, the differences among creditors
point to the desirability of ensuring proper differentiation, and the
framework should envisage sufficient flexibility for the sovereign debtor
to determine the categories of debt to be excluded from the mechanism.

17. We should stress that the main emphasis of the Fund's work in this
area should continue to be on crisis prevention rather than on
crisis resolution, and that the SDRM should not be viewed as synonymous
with crisis resolution. Traditional Fund financing and adjustment have
proven to be effective in solving crises across all continents.

III. Other Fund Policies

The Fund and Poverty Reduction

18. Worldwide efforts to reduce poverty in middle-income and low-income
developing countries are facing a new obstacle with the slowdown in economic
activity in the advanced economies. Thus, countries and the international
community should work harder to go back to an adequate path to achieve
the UN's Millennium Development Goals, especially to halve poverty by
2015. Last March the Monterrey Consensus adopted the lessons learned from
recent experiences in a wide range of countries, regarding the need to
achieve measurable results in poverty reduction, with mutual responsibility
and accountability for both developed and developing countries, increasing
trade opportunities, implementing sound policies and institutions, and
scaling up effective development aid.

19. Despite the global economic slowdown and the recent significant decline
in primary commodity prices, the debt-service ratios were reduced substantially
for almost all Highly Indebted Poor Countries (HIPCs) in 2001. Still,
the greatest challenge for the international community is to provide assistance
for debt sustainability, in the face of recurrent and adverse shocks affecting
HIPCs. Continuous efforts by the Fund and the Bank in support of growth
and poverty reduction in these countries remain critical. Notwithstanding
the substantial relief provided under the HIPC Initiative, its magnitude
is still moderate when compared with the income losses associated with
distortions in the trading system. It is to be expected that during the
Doha round significant advances in the area of trade liberalization will
enhance market access by developing countries' exports.

20. A more pro-poor and pro-growth environment requires overcoming impediments
to the efficient use of budgetary resources in low- income countries,
including improvements in budget execution to enhance productivity. In
our view, this reaffirms the importance not only of political will, but
also of adequate financial and technical assistance resources to narrow
the institutional and administrative gaps that breed insufficient accountability
and inefficiency in budgetary management.

Combating Money Laundering and the Financing of Terrorism

21. Money laundering, the financing of terrorism, and other criminal
activities that weaken institutions and undermine social cohesion call
for a firm and coordinated international response. The Fund has
an important role to play, but we would like to reiterate our stance on
this subject, namely, that the Fund's involvement should be restricted
to its core areas of expertise. In addition, progress in the collaboration
with the FATF on developing a global standard should be geared toward
ensuring the uniform, cooperative, and voluntary nature of the ROSC process.
In particular, the publication of the report should be voluntary, as is
customary in ROSC exercises. All the countries of our constituency have
reported to the Fund their progress in the implementation of measures
taken to counter the financing of terrorism.

IV. On the Southern Cone Countries

22. The effects of the global slowdown on external demand, terms
of trade and financing, as well as the spillover from the regional turmoil
have resulted in a very difficult environment for the countries of our
constituency, prompting some of them to seek financial and technical support
from the IMF to reestablish the conditions for sustained growth. Argentina
is entering an unprecedented fifth year of recession and continues to
be excluded from international markets. After a severe depression, macroeconomic
conditions have stabilized --seasonally adjusted industrial production
has bottomed-out and financial indicators are showing less volatility.
But only with full restoration of the domestic credit and payments system
a firmer recovery would be secured serving to attenuate the risks of further
political and social deterioration. The Fund should maintain an active
engagement with the authorities to define ways to regain financial stability,
and conclude expeditiously an economic program that can be supported by
a stand-by. Uruguay obtained decisive support form the Fund in
the form of an arrangement with exceptional access, which has enabled
that country to correct a critical lack of liquidity in the banking system
and to stop a massive withdrawal of deposits. The arrangement has helped
to restore market confidence; sustained and consistent implementation
should now help the economic recovery while preserving macroeconomic stability
and ensuring debt sustainability. Paraguay, which has also been
vulnerable to adverse developments in the region-in particular, its financial
sector-is seeking Fund support under a stand-by arrangement and is awaiting
passage of legislation included among the prior actions under the program.

On Chile

23. Chile has managed to weather the external shocks well. Export volumes
continue growing at fast rates, and GDP, capital formation, and even employment
are expanding, albeit more slowly than in the 1990s. This compares well
with Chile's experience in earlier global slowdowns, and with the effects
of the present slowdown on other open economies. Sound macroeconomic policies
and financial system strength, and Chile's broad diversification of its
export markets, have helped reduce its vulnerability to shocks, especially
to those that are country- or region-specific. But an open economy cannot
escape the effects of a global slowdown or a generalized aversion to emerging
market risks. As a result, GDP growth was 2.8 percent in 2001, much lower
than the average growth of the 1990s, and a somewhat lower rate is expected
for 2002 as the optimistic view of a relatively rapid recovery has been
dampened by the protracted weakness of the global economy, international
financial turmoil, and regional instability. Growth is expected to accelerate
in 2003, supported mostly by domestic factors.

24. Domestic demand has been depressed by external factors, including
worsening terms of trade, weaker investor confidence, diminished net external
financing, and, to some extent, by the wealth effect created by the real
depreciation of the peso. Domestic factors, including an easier monetary
policy and the full operation of the automatic fiscal stabilizers, are
supporting domestic demand. Moreover, the relative price effect of the
peso depreciation is helping to sustain economic activity through expanding
export volumes and contracting imports. To counter shocks and stimulate
recovery, Chile has used a rule-based policy framework, including an explicit
fiscal target, inflation targeting, and a floating exchange rate system,
while moving forward with the structural and social reform programs.

25. Chile's fiscal policy is based on an explicit target for the
central government structural balance, set at a surplus of 1 percent of
GDP. This rule-based fiscal policy has increased the confidence of the
financial markets, giving Chile the lowest sovereign spread in the region
and one of the lowest among all emerging market economies. The benefits
of this reduced financing cost accrue also to private investment, and
this broader effect of fiscal consolidation on financing costs and aggregate
demand is deemed more significant than that of a temporary fiscal expansion.
To respond to the slowdown of activity and the higher unemployment rate,
the composition of public spending has been modified to accelerate labor-intensive
public investment projects and implement a program of employment subsidies.

26. Monetary policy is based on a symmetric target range for inflation.
The target has been met continuously and presently inflation is at the
lower boundary, allowing for a supportive stance of monetary policy. The
central bank continues to foster the development of a financial market
for peso instruments, including deepening the market for central bank
peso notes, and it has extended to five years the longer end of the maturity
range, while keeping at twenty years that of the CPI-indexed instruments.
The recent first issue of five-year peso notes was a big success with
an annual yield of 5.8 percent, compared to a 2.8 percent yield in inflation-adjusted
instruments of the same maturity; this points to implicit inflationary
expectations for the next five years fully in line with the central bank's
annual inflation target, 3 percent.

27. The floating of the peso is an essential element of Chile's
policy framework, and interventions in the currency market are reserved
for exceptional circumstances. The volatility and strong correlation with
regional currencies displayed by the peso at times of financial turmoil
do not represent fundamentals. The fundamentals for the Chilean peso remain
strong, based on sustained productivity and export volume growth, a low
current account deficit and a strong liquidity position. Net international
reserves remain comfortably high, hovering around US$15 billion, equivalent
to more than two times Chile's short-term external debt at residual maturity.

28. Progress in structural reforms is continuing. The complete
elimination of all remaining restrictions on foreign exchange operations
and the continued efforts to develop an external market for peso-denominated
instruments have been complemented by the subsequent completion of the
first phase of the capital market reform, including increasing scope for
voluntary savings, the elimination of the capital gains tax on certain
trades, and the reduction of the tax rate on interest receipts for non-resident
investors. In addition, several initiatives have been adopted to increase
the flexibility of the operations of institutional investors. The single
external tariff rate will reach 6 percent in about three months, without
quota limits; a free trade agreement has been concluded with the European
Union, and another agreement is being negotiated with the United States.
Discussions have been held with private sector representatives on a broad
agenda for promoting growth and increasing efficiency. The main goals
are to further promote international integration, to foster the development
of new segments of the local capital market, to improve competition and
the resolution of economic disputes, to increase labor market flexibility,
and to improve the incentives created by the regulations of key sectors.

29. A far-reaching social program seeks to complement economic
growth in the fight against poverty. In education, the government's efforts
to create equal opportunities have been directed at increasing the access
to financing for university education, under a program that seeks to increase
access to private bank lending at regular market rates by providing guarantees
that are linked to conditions of career advancement. A new health initiative
will provide a wide coverage health plan aimed at giving universal access
to a carefully defined set of essential medical services under a new scheme
that carries markedly improved incentives for public health providers.

30. All of these are significant steps forward indicating that
Chile continues to make progress in implementing policies aimed at fostering
stability and stimulating growth, and showing that the prolongation of
the present period of sluggish growth is mostly the result of continuing
global and regional difficulties that eventually will be overcome.